Do Your Own Taxes Or Hire An Accountant?
Despite what many have advised, I’ve been doing my own taxes for the past 8 years. Along the way, I’ve cocked things up, such as one time when I forgot to report the cost basis to over $1 million dollars worth of stock proceeds! For some reason, I just passed over the stock section of the software. You can imagine my surprise when I got a tax bill from the IRS for over $300,000! By not putting the cost basis down, the IRS thought I had another $1 million worth of income that I hadn’t paid taxes on. Instead, I only had about $10,000 worth of extra income since my cost basis was around ~$990,000 (trading is tough and not worth it!).
After scrambling to gather all my stock purchase prices, I submitted everything to the IRS and prayed it was all just a silly mistake. I gave the IRS folks a ring in Utah to explain what I had sent in, and they were so nice. The man on the other end said, “Not to worry, we see these types of mistakes all the time.“ Two months later, I got a letter from the IRS saying I owed them minimal interest, and taxes on only my profits of ~$10,000, or about $3,000. Phew! Thank goodness.
Lesson learned. Always report your cost basis and save all records of transactions. You know I’ll never mess up that section again. I just told you a story as to why you might not want to do your taxes yourself. That said, I cherish every learning experience and would do it over again.
WHY YOU SHOULD DO YOUR OWN TAXES
My stock transaction incident happened years ago when I first started doing my taxes myself. Since then, tax software from the likes of H&R Block have improved tremendously and makes messing things up more difficult. Overall, it takes me about 2-3 hours a year to do my taxes using HR Block’s tax software and I just love it. My taxes are complicated too, with rental properties, private equity investments, stock transactions, normal income, side income and so forth. Here are several reasons why you should do your own taxes:
* You learn how the system works. Once you start doing your taxes, you begin to realize how complicated the US government taxation system is. You’ll learn how all the nice credits the government tells you about really doesn’t apply to you because you make more than a threshold they never publicize. You learn what a W2, 1099, 1099-MISC, 5498, 1098, K1, 1040, 8582, Schedule-E all mean. With knowledge comes the ability to optimize your own taxes.
* You learn about your own finances. Given you now have a better understanding of how the tax system works, you start thinking about your own finances in a different way. You adjust your own finances in accordance with what the government encourages all Americans to do i.e. buy a home and start a business. You don’t have to actually go and buy a home or start a business, but you can put in pro forma numbers into the program and see what happens to your taxes if you do. Doing your taxes allows you to play around with different scenarios and understanding the outcomes. This is the best reasons as to why one should do their own.
* The IRS people are good people. Contrary to what you read in the movies about big, bad IRS agents crushing people’s lives, IRS folks are actually really supportive. I’ve called them numerous times to ask for help, and each time they have been so friendly and courteous. Why is this? The reason is because they know the tax system is so damn complicated that everybody makes mistakes. In fact, I’d venture to guess that the majority of taxes done by individuals and professionals have at least one mistake, or one sub-optimal entry. The IRS are not out there to punish normal folks like you and me. They are there to help you. A bad IRS reputation is definitely one of the key reasons why most people are afraid to do their own taxes.
* Your tax professional won’t listen to you. Another simple reason as to why you would do your own taxes. Some people are very aggressive on their returns. I was speaking to my CPA friend the other day, and he said a couple who makes only $80,000 a year working in hotel services wanted to deduct $40,000 in expenses! No way was my friend going to submit that through given his firm’s reputation and his name is on the line. Most people don’t go to jail for blatant errors on their tax forms. Instead, what the IRS does is wait 3 years to send you a notice, which contains a 5% penalty a year so they can try and make more money from you.
* You control your own schedule. Although it takes me 2-3 hours to do my own online taxes, once done, I like to let it sit for a while so I can revisit my returns on a later date. The reason why I wait is because there are tax forms that sometimes come late, such as a K-1 statement for a private company I own. Another reason is because you want to think things through on what you’ve inputted to make sure everything will fly. I seldom ever go to the movies anymore because it’s a PITA to go find parking, buy a ticket, sit in a crowded theater, and have people yap on their phones next to you. Instead, I like to watch at home on my own sweet setup where I can pause to go to the bathroom, or rewind to re-watch the cool scene.
WHY YOU SHOULDN’T DO YOUR OWN TAXES
* You are bad with numbers. If numbers make you sick, don’t do your own taxes. It’s easy to mess up your taxes if you are not careful. Errors can cost (or gain) you much more than what a mistake free tax return will cost you. That said, I firmly believe the majority of tax returns have sub-optimal entries.
* You have the best accountant and you don’t care about money. If you have a rock-star accountant who is on the same page with you in terms of tax philosophy, you might as well have him or her do your taxes for you. Furthermore, if you don’t care about spending $500-$1,500 for an outstanding CPA, go for it. The CPA might be able to get you much more than an extra $500-$1,500, maybe. I say maybe, because there’s only so much you can do before you go into the grey area.
* You have an incredibly diverse amount of investments and income streams. If you have 5 rental properties, 3 vacation homes, 5 different private investments, annuities, dividends, a side business and make multi-millions, you probably want to have a season pro do your taxes. If you only have a W2 and a home mortgage, there’s no reason why you can’t do your taxes yourself.
* You don’t enjoy reviewing your work. If you were the type in school who took your final exam and handed it in without reviewing your answers thoroughly, you want to hire an accountant. I personally love reviewing spreadsheets, budgets, tax documents, essays, over and over until I get sick of it.
Since you’ve gotten this far, you’re in for a treat.
USE H&R BLOCK FOR FREE AT HOME!
For the past 8 years, I’ve been using H&R Block to do my own taxes. This year was the first time I did them online, and I’m pleased to report back that it’s pretty much the same as doing things with their CD software. I have to admit that my fears of doing my taxes online were two-fold: 1) Security and 2) What if all the work I’ve done doesn’t save. But, as with anything done electronically, there is a security risk. I’m glad to see H&R Block online have a nice “Save” button, which does work after I logged in with another browser to check.
My one and only roadblock was when I came to form 8582 (Passive Activity Loss Limitations) for rental property. When I clicked the box saying I have passive losses for my rental when I first bought it 9 years ago, the program suggested I call an H&R Block Tax Professional because supposedly this is a complicated thing. Well, it’s not complicated to me, and I wasn’t about to now call an H&R Block Tax professional to do my taxes after I spent 2 hours doing my own. I clicked “skip” and then the program warned me that the passive loss form won’t be included in my form, and that I might have some issues. Well that’s not very comforting, given I do have some passive losses!
It turns out after doing some digging, that passive losses for an active landlord is not allowed anyway if you make over $150,000 a year. After $150,000, you cannot carry over any passive losses to help reduce your tax bill once you rental starts making positive income. What I’m hoping is that the passive losses can be tacked on to my cost basis for the property if I ever sell it, so that my tax bill is less since my profits are less. I’ve been assured by an accountant this is the case, but we will cross that bridge when we come to it. For now, I’ve learned a lot, and I’m keeping all records.
Overall, I’m very pleased with H&R Block’s Online system, and I would recommend the product to anyone. They’ve been refining their DIY software for the past 10 years. It’s always intimidating to take on new things, but after some practice, all you’ll want to do is do your own taxes. Once you understand the basic concepts, the rest of it is data gathering and data entry. It’s a very rewarding feeling learning about your own finances. Combine straightforward tax software with all the answers you can find on the internet and you’ve got plenty of ammunition to do your own taxes.
Get H&R Block At Home: H&R Block is so easy to use, anybody can do their own taxes with their step by step guide with audit protection. The program has consistently found thousands of extra dollars in tax savings I did not realize I could have. Why bother paying an account hundreds of dollars when you can learn more about your financials, find extra tax savings, and do it all from the comfort of your own home? Get the H&R Block At Home Online Free Edition!